Introduction to Options





Kerry Back

Financial Options

  • A financial option is a right to buy or sell a financial security.

  • The right trades separately from the (underlying) security and usually even on a different exchange.

  • The rights are not (usually) issued by the companies who issue the underlying securities.

  • Instead, the rights are created when someone buys one from someone else. The number that exist at any point in time is called the open interest.

Calls and Puts

  • A call option gives the holder the right to buy an asset at a pre-specified price.

  • A put option gives the holder the right to sell an asset at a pre-specified price.

  • The pre-specified price is called the exercise price or strike price.

Maturities

  • An option is valid for a specified period of time, the end of which is called its expiration date or maturity date.

  • Most financial options can be exercised at any time the owner wishes, prior to maturity. Such options are called American.

  • There are some options that can only be exercised on the maturity date. They are called European.

  • Both types are traded on both continents. Stock options traded on the CBOE in the U.S. are always American.

Option premia

  • You pay upfront to acquire an option. The amount you pay is called the option premium. It is not part of the contract but instead is determined in the market.

  • The buyer of an option pays upfront and then has an option. The buyer is said to be long the option.

  • The seller of an option receives the buyer’s payment and then has an obligation. The seller is said to be short the option.

Clearinghouse and margin

  • For exchange traded options, the exchange clearinghouse becomes the counterparty to both the longs and the shorts.

  • When a long chooses to exercise, the clearinghouse delivers.

  • Simultaneously, the clearinghouse randomly chooses a short and requires it to deliver to the clearinghouse.

  • Sellers of options must post margin, so the clearinghouse and their brokers are confident they will be able to deliver.

Buying, Selling, and Exercising

  • Anyone with an appropriate brokerage account can at any time either buy or sell an option.

  • Individuals usually buy options instead of selling them, though they may sell as part of a portfolio (e.g., buy one option and sell another).

  • After buying an option, investors usually sell it later instead of exercising. However, the right to exercise is what gives an option its value.

Market data

Getting market data from Yahoo

import yfinance as yf

tick = yf.Ticker("CVX")
lastprice = tick.history().Close.iloc[-1]
print(f"last CVX price was ${lastprice:.2f}")

tick.options
last CVX price was $175.50
('2022-12-09',
 '2022-12-16',
 '2022-12-23',
 '2022-12-30',
 '2023-01-06',
 '2023-01-13',
 '2023-01-20',
 '2023-02-17',
 '2023-03-17',
 '2023-06-16',
 '2024-01-19',
 '2024-06-21',
 '2025-01-17')

Calls and puts for specific maturity

maturity = tick.options[0]
options = tick.option_chain(maturity)
calls = options.calls
puts = options.puts
calls.info()
<class 'pandas.core.frame.DataFrame'>
RangeIndex: 32 entries, 0 to 31
Data columns (total 14 columns):
 #   Column             Non-Null Count  Dtype              
---  ------             --------------  -----              
 0   contractSymbol     32 non-null     object             
 1   lastTradeDate      32 non-null     datetime64[ns, UTC]
 2   strike             32 non-null     float64            
 3   lastPrice          32 non-null     float64            
 4   bid                32 non-null     float64            
 5   ask                32 non-null     float64            
 6   change             32 non-null     float64            
 7   percentChange      32 non-null     float64            
 8   volume             29 non-null     float64            
 9   openInterest       32 non-null     int64              
 10  impliedVolatility  32 non-null     float64            
 11  inTheMoney         32 non-null     bool               
 12  contractSize       32 non-null     object             
 13  currency           32 non-null     object             
dtypes: bool(1), datetime64[ns, UTC](1), float64(8), int64(1), object(3)
memory usage: 3.4+ KB

0 1
contractSymbol CVX221209C00090000 CVX221209C00105000
lastTradeDate 2022-11-08 17:24:07+00:00 2022-11-21 17:01:10+00:00
strike 90.0 105.0
lastPrice 95.6 71.9
bid 84.95 69.95
ask 85.25 70.3
change 0.0 0.0
percentChange 0.0 0.0
volume NaN NaN
openInterest 0 2
impliedVolatility 0.00001 0.00001
inTheMoney True True
contractSize REGULAR REGULAR
currency USD USD